In the past three months, four individuals have felt the full force of the Department of Justice (DOJ) for not properly depositing their payroll taxes. That’s right. You heard it here first.
Not making your payroll tax deposits can now earn you three hots and a cot. The Feds have officially taken off the gloves when dealing with this all-too-common occurrence.
Last June, John Worthings of Owing Hills, Maryland, plead guilty to not reporting or not paying over $2.8M in payroll taxes to the IRS. Instead of making his deposits, he used the money for vacations, golf memberships, and tickets to baseball games.
Last July, Frank Stevens was sentenced to 15 months in the slammer for not paying $700K in payroll taxes. Mr. Stevens prevented the Service from collecting the taxes through levies on his accounts by keeping only $0.01 in the bank.
Jailing taxation scofflaws is new. In the past, we never worried about jail time on these cases because the Service was primarily a collection agency. They used to take the approach that they couldn’t collect money if you were behind bars.
This now has changed.
There are two sides to federal payroll taxes. First is the Employer Side which includes the Unemployment Taxes as well as the company side of Social Security and Medicare.
If the company fails to make these payments then it doesn’t turn into much of a nightmare. Since it’s purely a corporate obligation, these can be relieved in a bankruptcy.
But the other side which includes the payroll taxes withheld from employee checks creates the majority of issues. If you fail to make these deposits, since the money technically never belonged to you or your business, you’ll be held personally liable for this “theft” from your employees.
You are considered the “Trustee” on behalf of the government to get them your employee’s payroll deposits. If you don’t make these deposits, then neither a business nor a personal bankruptcy can help you.
These Trust Fund Recovery Penalty (TRFP) Cases have become insane. Given the facts and circumstances of the case, in the old days they simply assessed a penalty of up to 100%. But now, in many cases they’re also pushing for jail time.
The TRFP can be assessed against anyone who is the responsible person for making the payroll tax deposits. That “anyone” can be an owner, or an employee.
In order to assess the TRFP, they must prove that the individual…
1 – Is the responsible party for paying withheld income and employment taxes or excise taxes.
2 – Willfully failed to collect or pay them.
Please make a special note of that last sentence. If a person willfully fails to collect payroll taxes by intentionally putting individuals on as 1099 contractors instead of properly withholding income taxes and treating them as employees, these same penalties can apply to them as well.
Let me leave you with this.
This is a big deal. It’s not nothing. I want all of you to take a moment and realize how this could affect you.
Let’s not get into whether or not this is reasonable or fair. No one who does what I do and actually knows what they’re doing will ever tell you that tax law is either reasonable or fair.
We’re also not going to talk about the large, national, publicly traded companies like Uber and Lyft, that are currently perpetrating this obvious infraction by treating their drivers as independent contractors. They aren’t getting away with anything.
All of these companies are currently in the middle of some of the ugliest lawsuits and other federal actions that you could possibly imagine. But my job isn’t to worry about them.
I’m going to take a moment and assume that all of you are smart enough to not want to put yourselves in this position.
If you aren’t making your payroll tax deposits, whatever the reason happens to be, you need to put the money together and get it to the Service now. If you’re still treating people as independent contractors, you need to stop that today, and put them on the payroll.
And if you don’t think it can happen to you, think again. The only thing we’d need is a Revenue Officer looking for their next promotion who’s bucking for Archbishop.
If you need to make changes, make them today. That’s it. That’s all.
We’re all going to get through this. Let’s get through it together.
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